GAAP 2017 Interpretation and Applicatrion of Generally Accepted Accounting Principles WILEY

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Page i

GAAP

2017

Interpretation and Application of
GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES


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Page ii

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Page iii

GAAP

2017

Interpretation and Application of
GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES

Joanne M. Flood


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Page iv

This edition first published 2017
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Page v

CONTENTS
Preface

ix

About the Author

xiii

Codification Taxonomy

xv

1

ASC 105 Generally Accepted Accounting Principles

1

2

ASC 205 Presentation of Financial Statements

25

3

ASC 210 Balance Sheet

35

4

ASC 215 Statement of Shareholder Equity

49

5

ASC 220 Comprehensive Income

51

6

ASC 225 Income Statement

59

7

ASC 230 Statement of Cash Flows

69

8

ASC 235 Notes to Financial Statements

91

9

ASC 250 Accounting Changes and Error Corrections

97

10

ASC 255 Changing Prices

125

11

ASC 260 Earnings Per Share

129

12

ASC 270 Interim Reporting

161

13

ASC 272 Limited Liability Entities

173

14

ASC 274 Personal Financial Statements

177

15

ASC 275 Risks and Uncertainties

185

16

ASC 280 Segment Reporting

191

17

ASC 305 Cash and Cash Equivalents

201

18

ASC 310 Receivables

203

19

ASC 320 Investments—Debt and Equity Securities

243

20

ASC 321 Investments—Equity Securities

267

21

ASC 323 Investments—Equity Method and Joint Ventures

273

22

ASC 325 Investments—Other

307

23

ASC 330 Inventory

317

24

ASC 340 Other Assets and Deferred Costs

357

25

ASC 350 Intangibles—Goodwill and Other

373

v


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vi

Contents
26

ASC 360 Property, Plant, and Equipment

397

27

ASC 405 Liabilities

443

28

ASC 410 Asset Retirement and Environmental Obligations

447

29

ASC 420 Exit or Disposal Cost Obligations

463

30

ASC 430 Deferred Revenue

469

31

ASC 440 Commitments

471

32

ASC 450 Contingencies

475

33

ASC 460 Guarantees

483

34

ASC 470 Debt

495

35

ASC 480 Distinguishing Liabilities From Equity

533

36

ASC 505 Equity

551

37

ASC 605 Revenue Recognition

579

38

ASC 606 Revenue from Contracts with Customers

635

39

ASC 610 Other Income

707

40

ASC 705 Cost of Sales and Services

711

41

ASC 710 Compensation—General

713

42

ASC 712 Compensation—Nonretirement Postemployment Benefits

719

43

ASC 715 Compensation—Retirement Benefits

721

44

ASC 718 Compensation—Stock Compensation

769

45

ASC 720 Other Expenses

807

46

ASC 730 Research and Development

813

47

ASC 740 Income Taxes

819

48

ASC 805 Business Combinations

873

49

ASC 808 Collaborative Arrangements

921

50

ASC 810 Consolidations

931

51

ASC 815 Derivatives and Hedging

975

52

ASC 820 Fair Value Measurements

1031

53

ASC 825 Financial Instruments

1055

54

ASC 830 Foreign Currency Matters

1065

55

ASC 835 Interest

1093

56

ASC 840 Leases

1113


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Contents

vii

57

ASC 842 Leases

1179

58

ASC 845 Nonmonetary Transactions

1185

59

ASC 850 Related-Party Disclosures

1199

60

ASC 852 Reorganizations

1201

61

ASC 853 Service Concession Arrangements

1205

62

ASC 855 Subsequent Events

1207

63

ASC 860 Transfers and Servicing

1211

64

ASC 900s Specialized Industry GAAP

1249

Appendix A: Definitions of Terms

1381

Appendix B: Disclosure Checklist for Commercial Businesses

1405

Index

1511

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Page ix

PREFACE
Wiley GAAP 2017: Interpretation and Application provides analytical explanations, copious
illustrations, and nearly 300 examples of all current generally accepted accounting principles. The
book integrates principles promulgated by the FASB in its Accounting Standards Codification.TM
This edition of Wiley GAAP is organized to align fully with the structure of the FASB Codification.
Each chapter begins with a list of the Subtopics included within the Topic, major scope and scope
exceptions, technical alerts of any FASB Updates, and an overview of the Topic. The remainder of
each chapter contains a detailed discussion of the concepts and practical examples and illustrations. This organization facilitates the primary objective of the book—to assist financial statement
preparers and practitioners in resolving the myriad practical problems faced in applying GAAP.
Hundreds of meaningful, realistic examples guide users in the application of GAAP to the
complex fact situations that must be dealt with in the real world practice of accounting. In addition
to this emphasis, a major strength of the book is that it explains the theory of GAAP in sufficient
detail to serve as a valuable adjunct to accounting textbooks. Much more than merely a reiteration

of currently promulgated GAAP, it provides the user with the underlying conceptual bases for the
rules. It facilitates the process of reasoning by analogy that is so necessary in dealing with the
complicated, fast-changing world of commercial arrangements and transaction structures. It is
based on the author’s belief that proper application of GAAP demands an understanding of the
logical underpinnings of all its technical requirements.
As a bonus, a comprehensive disclosure checklist, following the main text, offers practical
guidance to preparing financial statements for commercial entities in accordance with GAAP. For
easy reference and research, the checklist follows the order of the codification.
The following FASB Accounting Standards Updates were issued since Wiley GAAP 2016 and
through May 2016. Their requirements are incorporated in this edition of Wiley GAAP, as and
where appropriate and at a minimum in the Technical Alert section at the beginning of the Topic
referenced in the ASU title.
• ASU 2015-10, Technical Corrections and Improvements
• ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory
• ASU 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined
Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965):
(Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient (consensuses of the FASB
Emerging Issues Task Force)
• ASU 2015-13, Derivatives and Hedging (Topic 815): Application of the Normal
Purchases and Normal Sales Scope Exception to Certain Electricity Contacts within
Nodal Energy Markets (a consensus of the FASB Emerging Issues Task Force)
• ASU 2015-14, Revenue from Contracts with Customers: (Topic 606): Deferral of the
Effective date
• ASU 2015-15, Interest—Imputation of Interest (Topic 835): Presentation and Subsequent
Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements—

ix


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Page x

Preface

•
•
•
•
•
•
•
•
•
•
•
•
•

Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF
Meeting (SEC Update)1
ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for
Measurement-Period Adjustments
ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred

Taxes 40)
ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities
ASU 2016-02, Leases (Topic 842)
ASU 2016-03, Intangibles—Goodwill and Other (Topic 350), Business Combinations
(Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815); Effective
Date and Transition Guidance (a consensus of the Private Company Council)
ASU 2016-04, Liabilities—Extinguishments of Liabilities (Subtopic 405-20): Recognition
of Breakage for Certain Prepaid Stored-Value Products (a consensus of the Emerging
Issues Task Force)
ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract
Novations on Existing Hedge Accounting Relationships (a consensus of the Emerging
Issues Task Force)
ASU 2016-06, Derivatives and Hedging (Topics 815): Contingent Put and Call Options
in Debt Instruments (a consensus of the Emerging Issues Task Force)
ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying
the Transition to the Equity Method of Accounting
ASU 2016-08, Revenue form Contracts with Customers (Topic 606): Principal versus
Agent Considerations (Reporting Revenue Gross versus Net)
ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting
ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic
815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09
and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting.

Significant accounting changes are on the horizon. In the next year, the FASB is expected to
make strides on the following major projects and others:
•
•

•
•

Revenue Recognition—technical improvements and corrections
Financial Instruments—Impairment
Financial Instruments—Hedging
Disclosure Framework

Readers are encouraged to check the FASB website for status updates to the above and other
FASB projects.
In response to the 2011 report of the Blue Ribbon Panel on Standard Setting for Private
Companies, the FASB began important initiatives. The FASB created the Private Company
Council to address the Blue Ribbon Panel’s report. The FASB issued a framework for the FASB
1

This book does not cover ASU 2015-15. The ASU is an EITF consensus, narrow in scope and only affects
two paragraphs in the SEC guidance section of ASC 835, which are not otherwise covered in this book.


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Page xi

Preface

xi

and the PCC to use in determining whether alternatives to existing and proposed U.S. GAAP are
warranted for private companies. Since 2013, FASB has issued three ASUs that are consensuses of
the PCC and in 2016 issued another. That is listed on the table above.
The author’s wish is that this book will serve preparers, practitioners, faculty, and students, as
a reliable reference tool to facilitate their understanding of, and ability to apply, the complexities of
the authoritative literature.
Joanne M. Flood
June 2016


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Page xii


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Page xiii

ABOUT THE AUTHOR
Joanne M. Flood, CPA, is an author and independent consultant on accounting and auditing

technical topics and e-learning. She has experience as an auditor in both an international firm and a
local firm and worked as a senior manager in the AICPA’s Professional Development group. She
received her MBA Summa Cum Laude in Accounting from Adelphi University and her
Bachelor’s degree in English from Molloy College.
While in public accounting, Joanne worked on major clients in retail, manufacturing, and
finance and on small business clients in construction, manufacturing, and professional services. At
the AICPA, Joanne developed and wrote e-learning, text, and instructor-led training courses on
U.S. and International Standards. She also produced training materials in a wide variety of media,
including print, video, and audio, and pioneered the AICPA’s e-learning product line. Joanne
resides on Long Island, New York, with her daughter, Elizabeth. Joanne is the author of several
articles for and contributor to Wiley Insight IFRS and the following Wiley publications:
Financial Disclosure Checklist
Wiley GAAP 2017: Interpretation and Application of Generally Accepted Accounting
Principles
Wiley Practitioner’s Guide to GAAS 2017: Covering all SASs, SSAEs, SSARSs, and
Interpretations
Wiley GAAP: Financial Statement Disclosures Manual (Wiley Regulatory Reporting)
Wiley Revenue Recognition
And the following AICPA online and live CPE programs:
Audit Staff Essentials, Level 1—New Hire
Audit Staff Essentials, Level 2—Experienced Staff
Audit Staff Essentials, Level 3—Audit Senior/In-Charge

xiii


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CODIFICATION TAXONOMY
Topic # and title
I.

Subtopic # and title

General Principles and Objectives
105

Generally Accepted Accounting Principles

105-10

Overall

II. Overall Financial Reporting, Presentation, and Display Matters
A. Overall Presentation of Financial Statements

205

Presentation of Financial Statements

210

Balance Sheet

215
220
225

Statement of Shareholders’ Equity
Comprehensive Income
Income Statement

230
235

Statement of Cash Flows
Notes to Financial Statements

205-10
205-20
205-30
205-40
210-10
210-20
215-10
220-10

225-10
225-20
225-30
230-10
235-10

Overall
Discontinued Operations
Liquidation Basis of Accounting
Going Concern
Overall
Offsetting
Overall
Overall
Overall
Extraordinary and Unusual Items
Business Interruption Insurance
Overall
Overall

B. Various Financial Reporting, Presentation, and Display Matters
250
255
260
270

Accounting Changes and Error Corrections
Changing Prices
Earnings Per Share
Interim Reporting

272
274
275
280

Limited Liability Entities
Personal Financial Statements
Risks and Uncertainties
Segment Reporting

250-10
255-10
260-10
270-10
270-40
272-10
274-10
275-10
280-10

Overall
Overall
Overall
Overall
Income Taxes
Overall
Overall
Overall
Overall

305-10
310-10
310-20
310-30

Overall
Overall
Nonrefundable Fees and Other Costs
Loans and Debt Securities Acquired
with Deteriorated Credit Quality
Troubled Debt Restructurings by
Creditors
Overall
Overall

III. Transaction-Related Topics
A. Financial Statement Accounts
305
310

Cash and Cash Equivalents
Receivables

310-40
320
323

Investments—Debt and Equity Securities
Investments—Equity Method and Joint

Ventures

320-10
323-10
323-30

xv

Partnerships, Joint Ventures, and
Limited Liability Entities


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xvi

Codification Taxonomy
Topic # and title

Subtopic # and title

325

Investments—Other

325-10
325-20
325-30
325-40

330
340

Inventory
Other Assets and Deferred Costs

330-10
340-10
340-20
340-30

350

Intangibles—Goodwill and Other

360

Property, Plant, and Equipment

405

Liabilities

410

Asset Retirement and Environmental
Obligations

420
430
440
450

Exit or Disposal Cost Obligations
Deferred Revenue
Commitments
Contingencies

460
470

Guarantees
Debt

340-40
350-10
350-20
350-30
350-40
350-50
360-10
360-20
405-10
405-20

405-30
405-40
410-10
410-20
410-30
420-10
430-10
440-10
450-10
450-20
450-30
460-10
470-10
470-20
470-30
470-40
470-50
470-60

480
505

Distinguishing Liabilities from Equity
Equity

480-10
505-10
505-20
505-30
505-50

505-60

Overall
Cost Method Investments
Investments in Insurance Contracts
Beneficial Interests in Securitized
Financial Assets
Overall
Overall
Capitalized Advertising Costs
Insurance Contracts that Do Not
Transfer Insurance Risk
Contracts with Customers
Overall
Goodwill
General Intangibles Other Than
Goodwill
Internal-Use Software
Web Site Development Costs
Overall
Real Estate Sales
Overall
Extinguishment of Liabilities
Insurance-Related Assessments
Obligations Resulting from Joint
and Several Liabilities
Overall
Asset Retirement Obligations
Environmental Obligations
Overall

Overall
Overall
Overall
Loss Contingencies
Gain Contingencies
Overall
Overall
Debt with Conversion and Other
Options
Participating Mortgage Loans
Product Financing Arrangements
Modifications and Extinguishments
Troubled Debt Restructurings by
Debtors
Overall
Overall
Stock Dividends and Stock Splits
Treasury Stock
Equity-Based Payments to
Non-Employees
Spin-offs and Reverse Spin-offs


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Page xvii

Codification Taxonomy
Topic # and title
605

606
610

Revenue Recognition

Revenue from Contracts with Customers
Other Income

Subtopic # and title
605-10
605-15
605-20
605-25
605-28
605-30
605-35
605-40
605-45
605-50
606-10
610-10
610-20
610-30

705

Cost of Sales and Services

705-10
705-20

710
712

Compensation—General
Compensation—Nonretirement
Postemployment Benefits
Compensation—Retirement Benefits

710-10
712-10

715

718

Compensation—Stock Compensation

720

Other Expenses

730

Research and Development

xvii

715-10
715-20
715-30
715-60
715-70
715-80
718-10
718-20
718-30
718-40
718-50
718-740
720-10
720-15
720-20
720-25
720-30
720-35
720-40
720-45
720-50

730-10
730-20

Overall
Products

Services
Multiple-Element Arrangements
Milestone Method
Rights to Use
Construction-Type and ProductionType Contracts
Gains and Losses
Principal–Agent Considerations
Customer Payments and Incentives
Overall1
Overall1
Gains and Losses from the
Derecognition of Nonfinancial Assets
Gains and Losses on Involuntary
Conversions
Overall
Accounting for Consideration
Received from a Vendor1
Overall
Overall
Overall
Defined Benefit Plans—General
Defined Benefit Plans—Pensions
Defined Benefit Plans—Other
Postretirement
Defined Contribution Plans
Multiemployer Plans
Overall
Awards Classified as Equity
Awards Classified as Liabilities
Employee Stock Ownership Plans

Employee Share Purchase Plans
Income Taxes
Overall
Start-Up Costs
Insurance Costs
Contributions Made
Real and Personal Property Taxes
Advertising Costs
Electronic Equipment Waste Obligations
Business and Technology Reengineering
Fees Paid to the Federal Government by
Pharmaceutical Manufacturers and
Health Insurers
Overall
Research and Development
Arrangements


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xviii

Codification Taxonomy
Topic # and title

740

Income Taxes

Subtopic # and title
740-10
740-20
740-30

Overall
Intraperiod Tax Allocation
Other Considerations or Special Areas

805-10
805-20

Overall
Identifiable Assets and Liabilities,
and Any Noncontrolling Interest
Goodwill or Gain from Bargain
Purchase, Including Consideration
Transferred
Reverse Acquisitions
Related Issues
Income Taxes
Overall
Overall
Control of Partnerships and Similar
Entities
Research and Development

Arrangements
Overall
Embedded Derivatives
Hedging—General
Fair Value Hedges
Cash Flow Hedges
Net Investment Hedges
Contracts in Entity’s Own Equity
Weather Derivatives
Overall
Overall
Registration Payment Arrangements
Overall
Foreign Currency Transactions
Translation of Financial Statements
Statement of Cash Flows
Income Taxes
Overall
Capitalization of Interest
Imputation of Interest
Overall
Operating Leases
Capital Leases
Sale-Leaseback Transactions
Overall
Overall
Overall
Quasi-Reorganizations
Income Taxes
Overall

Overall

B. Broad Transactional Categories
805

Business Combinations

805-30

808
810

Collaborative Arrangements
Consolidation

805-40
805-50
805-740
808-10
810-10
810-20
810-30

815

Derivatives and Hedging

820
825

Fair Value Measurements
Financial Instruments

830

Foreign Currency Matters

835

Interest

840

Leases

845
850
852

Nonmonetary Transactions
Related-Party Disclosures
Reorganizations

853
855

Service Concession Arrangements
Subsequent Events

815-10

815-15
815-20
815-25
815-30
815-35
815-40
815-45
820-10
825-10
825-20
830-10
830-20
830-30
830-230
830-740
835-10
835-20
835-30
840-10
840-20
840-30
840-40
845-10
850-10
852-10
852-20
852-740
853-10
855-10

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Page xix

Codification Taxonomy
Topic # and title
860

Transfers and Servicing

xix
Subtopic # and title

860-10
860-20
860-30
860-40
860-50

Overall
Sales of Financial Assets
Secured Borrowings and Collateral
Transfers to Qualifying SpecialPurpose Entities
Servicing Assets and Liabilities

905-10
908-10
910-10
910-20
912-10
912-20
915-10
920-10
922-10
924-10
926-10
926-20
928-10
930-10
932-10
940-10
940-20
942-10

Overall
Overall
Overall
Contract Costs
Overall
Contract Costs
Overall
Overall
Overall
Overall
Overall

Other Assets—Film Costs
Overall
Overall
Overall
Overall
Broker Dealer Activities
Overall

944-10
944-20
944-30
944-40

944-80
946-10

Overall
Insurance Activities
Acquisition Costs
Claim Costs and Liabilities for Future
Policy Benefits
Policyholder Dividends
Premium Deficiency and Loss
Recognition
Separate Accounts
Overall

946-20
948-10

Investment Company Activities
Overall

952-10
954-10
958-10
958-20
958-30
960-10

Overall
Overall
Overall
Financially Interrelated Entities
Split-Interest Arrangements
Overall

960-20
960-30
960-40

Accumulated Plan Benefits
Net Assets Available for Plan Benefits
Terminating Plans

IV. Industry/Unique Topics
905
908
910

Agriculture
Airlines
Contractors—Construction

912

Contractors—Federal Government

915
920
922
924
926

Development Stage Entities
Entertainment—Broadcasters
Entertainment—Cable Television
Entertainment—Casinos
Entertainment—Films

928
930
932
940

Entertainment—Music
Extractive Activities—Mining
Extractive Activities—Oil and Gas
Financial Services—Brokers and Dealers

942

Financial Services—Depository and
Lending
Financial Services—Insurance

944

944-50
944-60

946

Financial Services—Investment
Companies

948
950
952
954
958

Financial Services—Mortgage Banking
Financial Services—Title Plant
Franchisors
Health Care Entities
Not-for-Profit Entities

960

Plan Accounting—Defined Benefit
Pension Plans


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xx

Codification Taxonomy
Topic # and title
962

Plan Accounting—Defined Contribution
Pension Plans

965

Plan Accounting—Health and Welfare
Benefit Plans

970
972

976

978
980

Real Estate—General
Real Estate—Common Interest Realty
Associations
Real Estate—Real Estate Investment
Trusts
Real Estate—Retail Land
Real Estate—Time-Sharing Activities
Regulated Operations

985

Software

995

U.S. Steamship Entities

974

Subtopic # and title
962-10

Overall

962-40
965-10

Terminating Plans
Overall

965-20
965-30
965-40
970-10
972-10

Net Assets Available for Plan
Benefits
Plan Benefits Obligations
Terminating Plans
Overall
Overall

974-10

Overall

976-10
978-10
980-10
980-20

Overall
Overall
Overall
Discontinuation of Rate-Regulated
Accounting

Overall
Costs of Software to Be Sold,
Leased, or Marketed

985-10
985-20

V. Glossary

1

ASU 2014-09 added this Codification section. For more information on ASU 2014-09, see the Appendix to the chapter
on ASC 606.


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Wiley GAAP 2017: Interpretation and Application of Generally Accepted Accounting Principles, First Edition. Joanne M. Flood.
 2017 by the American Institute of Certified Public Accountants, Inc. Published 2017 by John Wiley & Sons, Ltd.

1 ASC 105 GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES

Perspectives and Issues

What Is GAAP?
Nonauthoritative Sources
Recognition Principles
Disclosure Principles

Definitions of Terms
Concepts, Rules, and Examples

1

The Concept of Materiality

2
2
2

Descriptions of Materiality

3

Other sources

3

SEC Guidance in the Codification

Standards-setting Process
Emerging Issues Task Force
Accounting Standards Updates
Maintenance Updates

American Institute of Certified Public
Accountants

Researching GAAP Problems
Codification Structure

Research Procedures
Step 1: Identify the problem
Step 2: Analyze the problem
Step 3: Refine the problem statement
Step 4: Identify plausible alternatives
Step 5: Develop a research strategy
Step 6: Search authoritative literature
Step 7: Evaluation of the Information Obtained

Search Authoritative Literature
(Step 6)—Further Explanation
Researching Wiley GAAP
Researching nonpromulgated GAAP

Technical Alert
Quantitative factors
Qualitative factors
Degree of precision

3
3

History of GAAP
GAAP Codification

Internet-based research sources

1

The Conceptual Framework
Components of the conceptual framework

10

11
11

11
12
12
13

13
14

CON 8—Chapter 1: The Objective of General
Purpose Financial Reporting
14
CON 8—Chapter 3: Qualitative Characteristics
of Useful Financial Information
15
CON 5: Recognition and Measurement in
Financial Statements of Business
Enterprises

17
CON 6: Elements of Financial Statements
18

3
3

4
4
4
4
4

5

Definitions of terms
Elements of not-for-profit financial statements

5

7

19
19

CON 7: Using Cash Flow Information and
Present Value in Accounting Measurements 20

7
8

8
8
8
8
9

How CON 7 measures differ from previously
utilized present value techniques
Measuring liabilities
Interest method of allocation
Accounting for changes in expected cash flows
Application of present value tables and formulas
Example of present value calculation
Example of an annuity present value calculation
Example of the relevance of present values
Practical matters

9
9
9

PERSPECTIVES AND ISSUES
What Is GAAP?
The FASB Accounting Standards CodificationTM (ASC) is the:
. . . source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the Securities and Exchange Commission (SEC) under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. In addition

1

20
21
21
21
22
22
23
23
23


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to the SEC’s rules and interpretive releases, the SEC staff issues Staff Accounting
Bulletins that represent practices followed by the staff in administering SEC disclosure
requirements, and it utilizes SEC Staff Announcements and Observer comments made at
Emerging Issues Task Force meetings to publicly announce its views on certain
accounting issues for SEC registrants. ASC 105-10-05-1

In the absence of authoritative guidance, the FASB Codification (the Codification) offers the

following approach:
If the guidance for a transaction or event is not specified within a source of authoritative
GAAP for that entity, an entity shall first consider accounting principles for similar
transactions or events within a source of authoritative GAAP for that entity and then
consider nonauthoritative guidance from other sources. An entity shall not follow the
accounting treatment specified in accounting guidance for similar transactions or events
in cases in which those accounting principles either prohibit the application of the
accounting treatment to the particular transaction or event or indicate that the
accounting treatment should not be applied by analogy. ASC 105-10-05-2

Nonauthoritative Sources. The Codification lists some possible nonauthoritative sources:

•
•
•
•
•
•
•

Practices that are widely recognized and prevalent either generally or in the industry,
FASB Concepts Statements,
American Institute of Certified Public Accountants (AICPA) Issues Papers,
International Financial Reporting Standards of the International Accounting Standards
Board,
Pronouncements of professional associations or regulatory agencies,
Technical Information Service Inquiries and Replies included in AICPA Technical
Practice Aids,
Accounting textbooks, handbooks, and articles.
(ASC 105-10-05-3)

GAAP establishes:

•
•
•
•

The measurement of economic activity,
The time when such measurements are to be made and recorded,
The disclosures surrounding this activity, and
The preparation and presentation of summarized economic information in the form of
financial statements.

GAAP develops when questions arise about how best to accomplish those items. In response
to those questions, GAAP is either prescribed in official pronouncements of authoritative bodies
empowered to create it, or it originates over time through the development of customary practices
that evolve when authoritative bodies fail to respond. Thus, GAAP is a reaction to and a product of
the economic environment in which it develops. As such, the development of accounting and
financial reporting standards has lagged the development and creation of increasingly intricate
economic structures and transactions.
There are two broad categories of accounting principles—recognition and disclosure.
Recognition Principles. Recognition principles determine the timing and measurement of
items that enter the accounting cycle and impact the financial statements. These are reflected in
quantitative standards that require economic information to be reflected numerically.
Disclosure Principles. Disclosure principles deal with factors that are not always quantifiable. Disclosures involve qualitative information that is an essential ingredient of a full set of


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Chapter 1 / ASC 105 Generally Accepted Accounting Principles

3

financial statements. Their absence would make the financial statements misleading by omitting
information relevant to the decision-making needs of the reader. Disclosure principles also
complement recognition principles by dictating that disclosures expand on some quantitative data,
explain assumptions underlying the numerical information and provide additional information on
accounting policies, contingencies, uncertainties, etc., which are essential to fully understand the
performance and financial condition of the reporting enterprise.

DEFINITIONS OF TERMS
See Appendix A, Definitions of Terms, for terms related to this topic: Conduit Debt Securities,
Financial Statements are Available to be Issued, Nongovernmental Entity, Nonpublic Entity, Notfor-Profit Entity, and Public Business Entity.

CONCEPTS, RULES, AND EXAMPLES
History of GAAP
From time to time, the bodies given responsibility for the promulgation of GAAP have changed,
and indeed more than a single such body has often shared this responsibility. In response to the stock
market crash of 1929, the AICPA appointed the Committee on Accounting Procedure. This was
superseded in 1959 by the Accounting Principles Board (APB) created by the AICPA. Because of
operational problems, in 1972 the profession replaced the APB with a three-part organization
consisting of the Financial Accounting Foundation (FAF), Financial Accounting Standards Board
(FASB), and the Financial Accounting Standards Advisory Council (FASAC). Since 1973 the

FASB has been the organization designated to establish standards of financial reporting.
Other sources. Not all GAAP has resulted from the issuance of pronouncements by
authoritative bodies. For example, depreciation methods such as straight-line and declining
balance have long been accepted. There are, however, no definitive pronouncements that can be
found to state this. Furthermore, there are many disclosure principles that evolved into general
accounting practice because they were originally required by the SEC in documents submitted to
them. Much of the content of statements of financial position and income statements has evolved
over the years in the absence of adopted standards.
GAAP Codification
In 2009, FASB’s Codification became the single official source of authoritative, nongovernmental US generally accepted accounting principles. It superseded all nongrandfathered
(see ASC 105-10-70-2 for a list of grandfathered guidance), non-SEC accounting guidance. Only
one level of authoritative GAAP exists, excluding the guidance issued by the Securities and
Exchange Commission (SEC). All other literature is nonauthoritative.
SEC Guidance in the Codification. To increase the utility of the Codification for public
companies, relevant portions of authoritative content issued by the SEC and selected SEC staff
interpretations and administrative guidance are included for reference in the Codification. The
sources include:

•
•
•
•

Regulation S-X,
Financial Reporting Releases (FRR)/Accounting Series Releases (ASR),
Interpretive Releases (IR), and
SEC staff guidance in:
• Staff Accounting Bulletins (SAB),
• EITF Topic D and SEC Staff Observer comments.

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The Codification does not, however, incorporate the entire population of SEC rules,
regulations, interpretive releases, and staff guidance. SEC guidance not incorporated in
the codification includes content related to auditing or independence matters or matters
outside of the basic financial statements, including Management’s Discussion and Analysis
(MD&A).
Standards-setting Process
The FASB has long adhered to rigorous “due process” when creating new guidance. The
goal is to involve constituents who would be affected by the newly issued guidance so that the
standards created will result in information that reports economic activity as objectively as
possible without attempting to influence behavior in any particular direction. Ultimately,
however, the guidance is the judgment of the FASB, based on research, public input, and
deliberation.
The Board issues guidance through Accounting Standards Updates (ASU) which describe
amendments to the Accounting Standards Codification. Once issued, the provisions become
GAAP after the stated effective date.
Emerging Issues Task Force. The Emerging Issues Task Force (EITF) was formed in 1984
by the FASB to assist the Board in identifying current or emerging issues and implementation

problems before divergent practices become entrenched. The guidance provided has often been
restricted to narrow issues that were of immediate interest and importance.
If an EITF consensus is approved by the FASB, it amends the FASB Codification through
an ASU.
Accounting Standards Updates. Accounting Standards Updates (ASUs) are composed of:

• A summary of the key provisions of the project that led to the changes,
• The specific changes to the Codification, and
• The Basis for Conclusions.
The title of the combined set of new guidance and instructions is Accounting Standards
Update YY-XX, where YY is the last two digits of the year and XX is the sequential number for
each update. All authoritative GAAP issued by the FASB is issued in this format.
The FASB organizes the content of ASUs using the same Section headings as those used in
the Codification. ASUs are not deemed authoritative in their own right; instead, they serve only to
update the Codification and provide the historical basis for conclusions.
The content from updates that is not yet fully effective for all reporting entities appears in the
Codification as boxed text and is labeled “pending content.” The pending content text box
includes the earliest transition date and a link to the related transition guidance, also found in the
Codification.
Maintenance Updates. As with any publishing practice, irregularities occur. To make
necessary corrections, the FASB staff issues Maintenance Updates. These are not addressed by the
Board and contain nonsubstantive editorial changes and link-related changes.
American Institute of Certified Public Accountants. Although it currently plays a
greatly reduced standard-setting role, the American Institute of Certified Public Accountants
(AICPA) has authorized the Financial Reporting Executive Committee (FinREC) to determine the AICPA’s policies on financial reporting standards and to speak for the AICPA on
accounting matters. FinREC, formerly the Accounting Standards Executive Committee


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Chapter 1 / ASC 105 Generally Accepted Accounting Principles

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(AcSEC), is the senior technical committee at the AICPA. It is composed of seventeen
volunteer members, representative of industry, analysts, and both national and regional public
accounting firms.
Researching GAAP Problems
These procedures should be refined and adapted to each individual fact situation.
Codification Structure. The FASB Codification is located on fasb.org. The site is intended
to be easily searchable for research purposes. This section provides an overview of the site’s
contents and search functionality.
Areas. On all pages of the site, all categories of the Codification are listed down the vertical
menu bar on the left side of the page, revealing the following Areas, and the numbering series for
each one:

• General Principles (100). (Establishes the Codification as the source of GAAP.)
• Presentation (200). (Topics in this area relate only to presentation matters; they do not
•
•
•
•
•
•

•
•

address recognition, measurement, and derecognition matters. Examples of these topics
are income statement, balance sheet, and earnings per share.)
Assets (300).
Liabilities (400).
Equity (500).
Revenue (600).
Expenses (700). (Clusters all types of expense-related GAAP into five broad categories,
which are cost of goods sold, research and development, compensation, income taxes, and
other expenses.)
Broad Transactions (800). (Contains the major transactional topics, such as business
combinations, derivatives, and foreign currency matters.)
Industry (900). (Itemizes GAAP for specific industries, such as entertainment, real estate,
and software.)
Master Glossary.

Topics. The Codification content is arranged by Area and then further divided by Topics,
Subtopics, Sections, and Subsections. FASB has developed a classification system specifically for
the Codification. The following is the structure of the classifications system: XXX-YY-ZZ-PP,
where:

•
•
•
•

XXX = topic,
YY = subtopic,

ZZ = section, and
PP = paragraph.

An “S” preceding the section number denotes SEC guidance. At the most granular level of
detail, the Codification has a two-digit numerical code for a standard set of categories.
The Codification Taxonomy can be found in the section that precedes Chapter 1.
Subtopics. Subtopics represent subsets of a topic and are typically identified by type or by
scope. For example, lessees and lessors are two separate subtopics of leases Topic 842. Each
topic contains an “overall subtopic” (designated “-10”) that generally represents the pervasive
guidance for the topic, which includes guidance that applies to all other subtopics. Each